Knotek Brothers v Ontario Processing Vegetable Growers, 2000 ONAFRAAT 8

Agriculture, Food and Rural Affairs Appeal Tribunal

Agriculture, Food and Rural Affairs Appeal Tribunal 1 Stone Road West Guelph, (Ontario) N1G 4Y2 Tel: (519) 826-3433, Fax: (519) 826-4232 Email: AFRAAT@ontario.ca

Tribunal d’appel de l’agriculture, de l’alimentation et des affaires rurales 1 Stone Road West Guelph (Ontario) N1G 4Y2 Tél.: (519) 826-3433, Téléc.: (519) 826-4232 Email: AFRAAT@ontario.ca

APPEAL: Knotek Brothers v Ontario Processing Vegetable Growers

Knotek Brothers v OPVG 2000 ONAFRAAT 8

STATUTE: Ministry of Agriculture, Food and Rural Affairs Act

HEARING: April 17 and 18, 2000

DATE OF DECISION: May 4, 2000

2000-08

NEUTRAL CITATION: 2000 ONAFRAAT 8

Knotek Brothers v Ontario Processing Vegetable Growers

IN THE MATTER OF THE FARM PRODUCTS MARKETING ACT AND SECTION 16 OF THE MINISTRY OF AGRICULTURE AND FOOD ACT.

AND IN THE MATTER OF: An Appeal to the Agriculture, Food and Rural Affairs Appeal Tribunal by Knotek Brothers from the February 24th, 2000, decision of the Ontario Processing Vegetable Growers (the Board) wherein the Board decided that Knotek Brothers had:

(1) produced vegetables contrary to the terms and conditions of their licence, (2) marketed vegetables contrary to the terms and conditions of their licence; and (3) have been party to an arrangement, the effect of which contravenes the terms of their licence resulting from the decision of the local board dated November 17, 1998.

As a consequence of this decision, the Board refused to issue a licence to Knotek Brothers to produce and market tomatoes in 2000.

Before: Jim Rickard, Chair; Anna Andres, Member; Murray Cardiff, Member.

Appearances: Ronald Lunau, counsel to the appellant. MaryRose Ebos, counsel to the appellant. Geoff Spurr, on behalf of the respondent, the Ontario Processing Vegetable Growers. Tom Graham, counsel to the Tribunal.

DECISION OF THE TRIBUNAL

This appeal was heard in Guelph, Ontario on April 17 and 18, 2000 at the Tribunal Boardroom, 1 Stone Road West. Knotek Brothers appealed to the Agriculture, Food and Rural Affairs Appeal Tribunal (the Tribunal) from the February 24th, 2000, decision of the Ontario Processing Vegetable Growers (the Board) wherein the Board decided that Knotek Brothers had:

(1) produced vegetables contrary to the terms and conditions of their licence, (2) marketed vegetables contrary to the terms and conditions of their licence; and (3) have been party to an arrangement, the effect of which contravenes the terms of their licence.

As a consequence of this decision, the Board refused to issue a licence to Knotek Brothers to produce and market tomatoes in 2000.

The name of the appellant, Knotek Brothers, Knotek Brothers Inc., and Chris and Mark Knotek were used interchangeably by the parties. The issue of the proper name of the appellant was raised at the start of the hearing by counsel to the Tribunal but was not disputed or defined by either party. The parties appeared to assume that all three name forms could be used interchangeably. The Tribunal will consistently use the term Knotek to refer to either Knotek Brothers, Knotek Brothers Inc., and/or Chris and Mark Knotek.

The Background

Acreage measurement is a cornerstone of the orderly marketing system for processing tomatoes. In the late 1980’s, the industry realized that in order for it to be competitive, raw product yields would have to increase. If this were to happen, there would be benefits to both growers and processors in the form of greater revenues per acre to growers and lower per unit costs for processors. Since that time, average yields for the Ontario industry have increased from under 20 tons per acre in 1990 to well over 30 tons per acre in each of the past several years.

Today, the productivity yield of a particular processor’s growers determines the price paid by the processor. The total production marketed to a processor is divided by the total acreage used to grow that production. The resultant average yield per acre determines the price the processor pays to each producer. From 0 to 30 tons per acre the price is fixed. Yields after 30 tons per acre result in a lower price per ton to all the producers that market to that processor. This system rewards high producers by getting them more tons per acre to sell and penalizes lower producers by paying them a discounted value per ton. When tomatoes are marketed from unmeasured acreage, a processor’s productivity (average yield) is going to be artificially inflated. As a result, when the productivity discount of the processor is higher than it should be, the cost per unit of tomatoes paid by the processor is lower than it should be and all growers marketing to that processor are paid less for their tomatoes. However, from the perspective of a grower that has marketed from an undeclared field, the gain in revenue resulting from marketing from the unmeasured acreage more then compensates for the decreased revenue received per ton.

The Board initiated a third party tomato acreage monitoring program in 1998 and utilized the services of AGRICORP to measure fields. As a condition of licence all producers agree to provide access to AGRICORP to measure all acres of tomato production.

Knotek is a producer of vegetables licenced by the Board. Knotek Farms Ltd., a corporation owned by the father of Mark and Chris Knotek, is also a producer of vegetables licenced by the Board. In 1998 Knotek delivered tomatoes to Nation Wide while Knotek Farms Ltd. delivered tomatoes to Heinz. In 1998 a 20 acre unmeasured field of tomatoes associated with one or the other of the Knotek family farm operations was found by the Board. The Board addressed the issue by deleting from the productivity record of both Heinz and Nation Wide, the yield and acreage of both Knotek and Knotek Farms Ltd. as it was not originally known which entity had produced the tomatoes. In 1998, the licence issued to Knotek by the Board permitted it to market 1,000 tons of tomatoes to Nation Wide. This would be grown on a 40 acre field. After a hearing in 1998, the Board found that Knotek had produced and marketed tomatoes to Nation Wide from the unmeasured field. If this field had not been detected this would have resulted in a higher processor productivity, with more dollars paid to Knotek and less dollars paid to all the other growers for Nation Wide in 1998. As a result of its finding, the Board reduced the 1999 production licence of Knotek by 50%. Over a two year period, with its 1998 licence limits, Knotek would produce and market a total of 80 acres of tomatoes (40 acres each year). In 1998 Knotek produced from 60 acres so the reduction in licence for 1999 to 50% allowed for 20 acres of production in 1999 thus bringing the total Knotek production to what it ought to have been for the two years. Because production from measured acres is so important to the orderly operation of the market, the Board also imposed the maximum penalty of 20% of the 1998 production to be applied to the 1999 production year. The end result is the Knotek licence for 1999 was restricted to 300 tons of production, or about 7 acres of tomatoes.

Knotek contracted in 1999 with Nation Wide for 300 tons of production and in fact marketed 149 tons of tomatoes under that licence.

In the summer of 1999, an investigation was undertaken relating to Knotek and David and Mary Holmes. David and Mary Holmes, a “new grower”, secured a contract from Nation Wide for 1,000 tons of tomatoes in 1999. The Board alleged that Knotek produced and marketed the tomatoes under David Holmes’ contract in 1999. The Board conducted a hearing into this allegation and as a result of finding that Knotek did produce the Holmes crop cancelled Knotek’s licence to grow tomatoes in 2000. This is the decision that is being appealed to the Tribunal at this hearing.

The Issue

The issue before the Tribunal is:

Did Knotek:

• produce vegetables contrary to the terms and conditions of its 1999 licence,
• market vegetables contrary to the terms and conditions of its 1999 licence; and
• be party to an arrangement, the effect of which contravenes the terms of its 1999 licence,

and, if Knotek did any or all of these things, does that warrant cancellation of Knotek’s licence to produce and market vegetables in 2000.

The Evidence and the Findings

Irene Finaldi told the Tribunal that:

• She is the Office Manager for Nation Wide.
• Nation Wide had a contract with Knotek Brothers in 1998 for 1,000 tons of processing tomatoes.
• Nation Wide became aware of an allegation that Knotek had produced from unmeasured acres in September of 1998.
• Nation Wide did not contract for these tomatoes but the Board made Nation Wide accept this production even though Nation Wide did not want it.
• While the Nation Wide contract allows it to order destruction of over-planted acres there is no provision for how to handle unmeasured acres.
• Nation Wide was aware of the Board decision to limit Knotek production to 300 tons in 1999 and the only contract Nation Wide gave to Knotek was a 300 ton contract.
• In 1999 Nation Wide issued a 1,000 ton (40 acre) contract to David Holmes, a new grower.
• David Holmes was one of three new growers for Nation Wide in 1999.
• Nation Wide is a small company and likes to spread the production acres over a larger area so if there is a disaster in one location it can still get production from another area.
• Nation Wide had seven or eight growers in total in 1999.
• Before giving the contract to David Holmes she had talked to other industry people, including AGRICORP, to make certain that Mr. Holmes was capable of producing the contracted tomatoes.
• Nation Wide prefers new growers because they follow instructions carefully and produce good quality.
• In 1999, Nation Wide purchased 149 tons of tomatoes from Knotek.
• She did not know that David Holmes was the brother-in-law of Chris and Mark Knotek until the Board’s auditor told her in November.
• She was called to a meeting at the Board office in January 2000 at which time members of the Board insisted that Nation Wide knew that Holmes was related to Knotek and was party to an arrangement to circumvent the restrictions placed on Knotek’s 1999 licence.
• Pine Valley, a company owned by her sister and brother-in-law, also has a contract with Nation Wide and uses all contracted labor to produce its tomatoes. Pine Valley has operated in this manner for at least three years and has been licenced by the Board.
• Knotek harvested the Holmes tomatoes and delivered them to Nation Wide, but not in Knotek trucks. There was an insect infestation in the Holmes tomatoes (stink bug) and Chris Knotek came to the plant to deal with this issue.
• AGRICORP measured Holmes 1999 tomato acreage to be 56.13 acres.
• All Nation Wide growers contract out some portions of the production work, some contract spraying, some trucking, some planting and some harvesting.
• David Holmes harvested 2,000 tons from his field but not all went to Nation Wide because of the insect infestation.

John Mumford told the Tribunal that:

• He is the General Manager of Board and has been since 1980.
• The primary objective of the Board is to negotiate prices and terms and conditions of sale for 12 or 13 crops of vegetables for processing.
• The Board negotiates raw product prices, terms of sale, payment dates, method of delivery with companies like Heinz, Nabisco, Bicks Pickles and smaller companies including Nation Wide. The board does not set the price but negotiates it on a processor and crop specific basis.
• The Nation Wide contract in 1999 was a negotiated agreement with the terms and conditions set out in the agreement. Each grower is subject to these terms as a minimum.
• Ontario has a small percentage of the world processing tomato crop. The Board instituted productivity pricing in order to encourage increased yield per acre so that the industry could improve its competitive position. Ontario has increased its average tomato yield from 18 to 20 tons per acre to 37 tons per acre since the program was put in place.
• When the unmeasured acreage was discovered in 1998 the Board did not know if it belonged to Knotek or Knotek Farms Ltd., each said it belonged to the other. The Board contacted both processors and agreed to delete all production from Knotek and Knotek Farms Ltd. from their productivity calculations. This was the only way the Board could assure that no innocent producer or processor was affected by the production from the unmeasured acreage.
• The Board told Nation Wide that it was only obligated to take the 1,000 tons under contract but Nation Wide took all 1,900 tons and paid for it. The Board has no authority to force a processor to take tonnage from any producer.
• He does not understand Nation Wide’s logic in agreeing to a planting of 56 acres of tomatoes for a 1,000 ton crop. It is in Nation Wide’s interest to have this quantity produced on the smallest acreage possible as that determines the price Nation Wide has to pay.
• There were 186 growers of processing tomato in 1999.
• Roger Sterling, the Manager of the Leamington Branch office of AGRICORP, told him in August that David Holmes was related to Knotek and that Knotek brothers were producing the 1999 Holmes contract. This was the first that the Board knew of the arrangement involving Knotek.
• When he learned of the Holmes-Knotek arrangement, he contacted legal counsel and was advised to monitor the situation and get the Board auditor to look at records at the end of the year to see what had been recorded.
• The 1999 audit revealed irregularities in the contracts and producer payments from Nation Wide.
• The restrictions placed on the Knotek licence in 1999 were for one year only. The refusal to issue a licence to produce in 2000 is for one year only. The only restriction contemplated on future licences is a written undertaking on the part of Knotek to abide by the Board rules.
• There is no prohibition in the regulations that prevents contracting work for tomato producers. The issue in this case is the limitation on the Knotek licence for 1998 and the arrangement made with David Holmes to circumvent the condition on this licence.
• Knotek was not informed by the Board that it could not enter into a custom work agreement. The order of the Board limited it to 300 tons of production.
• It would not have been inappropriate for Holmes, as a new producer, to contract out the field work for producing his tomatoes. The issue is that Knotek knew it should not be engaged, in any capacity, in the production of more than 300 tons of tomatoes in 1999.

Harry Grant Fraser, AGRICORP Regional Claims Manager for Essex, Kent, Lambton and part of Middlesex and Elgin told the Tribunal that:

• Normally an adjuster goes to the tomato processing plants at the time of contracting to discuss insurance with the producers. This happened at Nation Wide in 1999.
• In 1999 when the adjuster was at Nation Wide all producers, except David Holmes, were contacted at the time of contract signing at the plant.
• There were three “new grower” contracts last year.
• He made several calls to a Chatham phone number attempting to contact Mr. Holmes so he could determine the underwriting for the Crop Insurance Contract. He never did meet Mr. Holmes but took information on his production plans from him over the phone.
• Mr. Holmes was reluctant, but when pressed, indicated that Knotek was doing the field work.
• David Holmes used to be insured as a corn, winter wheat and soybean producer from 1992 onward. In 1997, Mrs. Holmes reported to AGRICORP that they were retiring from farming so would no longer require insurance.
• David Holmes did satisfy the AGRICORP requirements and obtain an insurance contract on his tomato crop.
• AGRICORP had red flagged the Knotek file as a result of the unmeasured acreage in 1998. When a damage report was made an adjuster went to view the crop and the damage. Not all reports of damage result in an adjuster’s visit but red flagged files are all checked.
• In 1998, because of the unmeasured acres, the contracts for Knotek and Knotek Farms Ltd. were combined to determine the yield.
• There was an early freeze damage report on the Holmes farm. Mary Holmes instructed AGRICORP to call Chris Knotek, the field manager, to discuss the damage.
• From the onset, AGRICORP knew Knotek was managing the Holmes crop.
• Holmes’ contract was for 1,000 tons on 40 acres. After the field was measured, Nation Wide submitted the additional acreage but left the tonnage at the same level so the coverage was for 1,000 tons of tomatoes. 1,300 tons had been harvested prior to the freeze so there was no claim on this farm. Chris Knotek signed the adjuster’s Inspection report.
• If AGRICORP had the information in the spring of 1999 that it now has, he would have gone through the separate farm coverage procedure to assess if Knotek and Holmes are indeed separate entities warranting separate contracts.

In his summation, Mr. Lunau argued that the evidence presented to the Tribunal does not justify the sanction imposed by the Board. No clear case of the arrangement between Knotek and Holmes had been presented and there is no direct evidence of the arrangement or a coherent theory of what would be offensive to the regulations. He said that Ms. Finaldi had told the Tribunal that David Holmes was not a front and she had made inquiries about his qualifications prior to issuing a contract in 1999. The Board staff admitted the only contract that could be produced was the 300 ton contract that complied with the Board rules. On face of the evidence there is full compliance with the December decision.

He argued that there is nothing wrong with the arrangement that Chris and Mark Knotek had with David Holmes. These types of arrangements exist throughout the community. David Holmes is related and that seems to be the only thing that is objectionable to the Board. The appellant’s position is that the Board’s General Regulations are invalid and contain language and confer powers not authorized by the Farm Products Marketing Act or the Commission Regulation which delegates powers to the Board.

He argued that, in the section of the Board regulation dealing with refusal to grant or renew a licence, the words “any other reason the Board considers proper” do not appear in the Act or the delegating regulation and therefore the Board regulation is invalid. He argued that Section 7(2) of the Act sets the maximum penalty that can be applied to a producer who fails to comply with all of the Board’s regulations at a 20% reduction in production of the regulated product. In the case of Knotek, the Board imposed a 70% reduction and this is beyond the power of the Board.

Mr. Lunau filed with the Tribunal a written argument and court decision in support of his position and asked that the Tribunal grant the appeal and direct the Board to issue a licence to Knotek for producing processing tomatoes in 2000.

In his summation and argument, Mr. Spurr told the Tribunal that the producers are the only parties in a position to provide evidence on what actually happened in 1999 and they chose not to testify at the hearing. He said this is not a “beyond reasonable doubt” situation but a “balance of probability” situation. What is the plausible explanation of what occurred? He argued that the facts show that Knotek was doing everything on the Holmes land, producing and marketing tomatoes under the Holmes contract. The arrangement between Knotek and Holmes was not open and disclosed to the Board or to Nation Wide. AGRICORP had to probe to get the information that Knotek was doing the field work for Holmes. Why was this information hidden? He said the purpose was to get around the limit imposed by the Board on Knotek for 1999. It was designed to accomplish an end run around the condition on the licence.

He argued that Regulation 440, Section 2 states that the purpose of the regulation is to control and regulate production and marketing of vegetables. He said that, reading the Regulation as a whole, it is clear that the Board has the authority to refuse to issue a licence, to prescribe terms and conditions on a licence and prohibit marketing of tomatoes except under authority of a licence. He filed copies of court decision in support of his argument that the Board regulation is valid.

He said that the 1998 decision of the Board was not appealed to the Tribunal and therefore ought not to be considered. However, he explained that the sanction imposed on Knotek in 1998 was composed of a 50% reduction in tonnage to offset the illegal production in 1998 from the unmeasured acres. This removed the benefit that Knotek received in 1998 by marketing tomatoes from unmeasured acres. Then, since measured acreage reporting is so important to the operation of the marketing plan, the maximum penalty of a reduction by 20% of the regulated product was imposed. The end result is a licence issued to Knotek for 1999 with a 300 ton limit. This condition on the licence was not appealed.

Mr. Spurr argued that the Tribunal should examine the circumstances of the case – Knotek had a conditional licence, Holmes appeared as a new tomato grower with the same licence amount as Knotek had in 1998, Knotek did all the husbandry and delivered the product to the processor. Clearly, this was an arrangement by Knotek to get around the Board order and this appeal should be denied.

The Tribunal examined the evidence and made the following findings of fact:

1. Knotek was allowed to produce and market 300 tons of tomatoes in 1999.
2. Knotek had a contract for 300 tons on seven acres which corresponds to their historical yield. Knotek produced 149 tons from this field. This is within the conditions placed on the licence.
3. David and Mary Holmes had a contract of insurance under their name developed after discussion with AGRICORP. They satisfied the requirements of AGRICORP. They were assigned as a production guarantee the average yield of Nation Wide producers (27 tons per acre), not the yield of Knotek (33.88 tons per acre).
4. David and Mary Holmes had been farming prior to 1997. In 1997, Mary Holmes advised AGRICORP that they were retiring from farming.
5. On May 1, 1999, Holmes rented 56 acres of new land to grow tomatoes. The production contract with Nation Wide was dated on April 29, so as soon as the production contract was assured land to grow the product was secured.
6. At harvest, when Nation Wide asked Holmes which rows were to be harvested first, Knotek replied.
7. After the early frost AGRICORP was notified and Mary Holmes said to talk to Chris Knotek about the problem. Mark Knotek signed the Crop Inspection report dated September 27, 1999.
8. Holmes produced 1,944.44 tons of tomatoes from 56.13 acres. (34.6 tons per acre) on a contract that called for 1,000 tons to be produced on 40 acres.
9. Knotek produced 149.48 tons of tomatoes from 7.15 acres (20.9 tones per acre).
10. Whether the Board exceeded its authority when it imposed a reduction of 70% on the Knotek licence to produce tomatoes in 1999 has not been appealed and therefore not a consideration at this hearing. It is now too late to appeal that decision of the Board.

The Board put together a reasonable picture of the events that there was an arrangement involving Holmes and Knotek. The evidence leads the Tribunal to believe that, on the balance of probabilities, Knotek participated with Holmes to engage in the production and marketing of tomatoes in excess of the amount allowed on Knotek’s conditional licence. Once the Board provided credible circumstantial evidence there is an obligation on Knotek to deal with this evidence and provide an explanation. No explanation was forthcoming. The Tribunal concludes that Knotek did all of the work in growing the crop for David and Mary Holmes and for all practical purposes, was the producer of these tomatoes. As knowledgeable producers of processing vegetables Knotek knew, or ought to have known, that the restrictions on its 1999 licence prevented it from engaging in an arrangement the effect of which would be to circumvent the restrictions placed on Knotek’s 1999 licence.

The Tribunal accepts the argument of Mr. Spurr that the Board’s General Regulations are legal and in effect. In making this determination the Tribunal notes that the reason that the Board refused to issue a licence to Knotek in 2000 was based on an infraction of the conditions placed on its 1999 licence and was not solely based on the clause “any other reason the Board considers proper”.

Decision and Reasons

After careful consideration of the evidence filed and submissions made, the Tribunal decided to deny the appeal of Knotek.

The reasons for this decision are:

1. The Tribunal finds the Board’s General Regulation to be legally in effect.
2. The Tribunal finds that Knotek and David Holmes entered into an arrangement the effect of which contravenes the terms of Knotek’s 1999 licence to produce processing tomatoes. In light of this finding, refusal by the Board to issue a licence in 2000 is warranted.

Dated at Guelph, Ontario this 4th day of May, 2000